Share Trading Basics

Submitted by Marco on 25 May, 2008 - 18:19

Before beginning on your trading journey, you must first learn some share trading basics.

Before beginning on your trading journey, you must first learn some share trading basics. You can start trading on the Australian sharemarket for as little as $500 plus brokerage costs, but most people start with $2000 minimum. Share trading involves the buying and selling or selling and buying of a stock – capital growth or capital decline for profit. Before you even starting buying and selling stocks like a mad man you must first ask yourself the following questions:

  • What do you want to achieve from your share trading?
  • What level of return do you expect? Do you think this is realistic?
  • Are you prepared to follow rules and systems in your share trading?
  • How much money are you prepared to risk in your share trading activities?

A basic principle of share trading is your time frame: this is the length of time you are prepared to stay in the market (which should factor in interest payments and other opportunity costs). When you set out to trade the sharemarket you are simply buying and selling or vice versa for profit. The length of time of a trade varies, depending on your trading plan. Just don’t allow your share trading transform (usually by default) into a share investment portfolio. Most of the time trading stocks involves a short time frame but there are trading systems which involve a longer time period. (Such traders who trade longer time frames may have a multitude of reasons why they have longer time frames: some may find it more comfortable or others may trade longer time frames to minimise their analysis time) Turning your share trading into an investment portfolio by default means that you have let a trade turn sour and you have not followed your planned exit from your trading plan.

There may be tax implications from your share trading activities. If your market trading activities match certain criteria set out by the taxation department, your professional share trading could be seen as a type of “business”. Please seek specific professional advise from your accountant.

The sharemarket are highly liquid*. Being liquid means that you are able to trade your shares quickly: buying and selling as you desire and having the trade executing close to your bid or ask price. * What’s the asterisk for? Well, there is a catch of course. Yes, the stockmarket is a liquid market, and many of the securities listed on the ASX are liquid. However, there are also many companies listed which are illiquid simply because they are smaller companies (small market capitalisation) and hence have less investor interest. The highly liquid companies are usually found in the top 10, 100 and 200 companies of the stockmarket (by market capitalisation). In the case of the Australian Securities Exchange (ASX), the companies listed in the ASX100 and ASX200 indices are the most liquid companies compared to the other listed companies on the sharemarket.

When you start share trading, realise that YOU are in control of your financial future. You decide how much money you trade with and you also control the amount of risk you are willing to place in the markets. It is important to decide the amount of money you trade the markets as well as your amount of risk, or in other words, your dollar amount you are willing to lose in one trade while trading the sharemarket. There are many formulas and methodologies you can calculate this risk level (which determines your stop loss price every trade), one of which is the 2 percent rule.